Our long-term unemployment headache

Australia largely avoided the recession but the recent sharp rise in long-term unemployed will be a problem for the Abbott Government, writes Greg Jericho.

Last week the latest figures on long-term unemployment showed the share of unemployed who have been out of work for more than a year reached it greatest level since 2004. This coincided with the release of two papers that examined the impact of long-term unemployment in America and the impact of unemployment on the disadvantaged in Australia.

Long-term unemployment is a somewhat arbitrary measure, some count it as being unemployed for six months and the ABS measures it as being unemployed for more than 52 weeks. On this measure, in February 20.9 per cent of all unemployed were long-term unemployed.

The breakdown of unemployment according to duration gives us a good insight into the drivers of the recent rise in unemployment.

As a general rule, about half of all unemployed have only been without a job for less than three months. The level of this "short-term" unemployed is a good proxy for the overall labour market. When economic times are good, the number of unemployed who have been unemployed for less than three months rises.

All three groups' rates declined as the economy improved from 2002-2008, and all three rose during the GFC. Not surprisingly, the long-term unemployment rate rose the slowest - because it takes longer for people to have been unemployed for a longer period.

But where the impact of the long-term unemployed becomes starkly apparent is when we look at the six monthly change in the unemployment rates of each time period:

In the past year - during a period when the total unemployment rate rose from 5.4 per cent to 6.0 per cent - the big move has been the rate of the long-term unemployed.

While this makes for a nice theoretical discussion, it has real impacts.

Last week the Brookings Institute in America released a paper authored by, among others, Alan Krueger, President Obama's former economics advisor and assistant secretary of the Treasury from 2009 to 2010.

The paper shows that those who have been unemployed for longer than six months have only "about a one-in-10 chance of moving into employment in any given month". This compared to a one-in-three chance if you had been unemployed for only a month.

But worse, not only did they find that people's chances of finding work decreased the longer they had been unemployed, they also found that when the long-term unemployed "do return to work their new jobs are often transitory".

The study noted that "after 15 months, the long-term unemployed are more than twice as likely to have withdrawn from the labour force than to have settled into steady, full-time employment."

While the situation with Australia is not completely analogous - because our unemployment benefits don't cut out after six months as they do in America - there are many similarities.

Last week the RBA released a paper examining economic disadvantage and employment. It noted that "one-third of the disadvantaged who were unemployed in 2011-12 were long-term unemployed."

It also found that "others who had been unemployed for a long time had become discouraged and were no longer actively seeking employment."

Among the impacts of long-term unemployment are "a depreciation of skills, reduction of social networks and adverse consequences in terms of health outcomes and life satisfaction". Add those together and you get a greatly reduced chance of finding employment.

This is reflected by the findings of the HILDA survey, which found that more than 75 per cent of those who were economically disadvantaged in 2005-06 and remained so in 2011-12 were either unemployed or not in the labour force.

The RBA noted as well that while employment was key for shifting people out of disadvantage, if that employment was only part-time or casual, that was less likely to achieve this goal.

Unfortunately the structural changes occurring in the economy are working against this as "since 2008, there has been little growth in employment in occupations where economically disadvantaged persons are typically employed - such as labourers, technicians and trades workers, and clerical and administrative roles."

While there has been a large increase in the numbers of community sector workers, these are among the lowest paid workers and low-paid work can mean people remain in disadvantage despite having a job.

The RBA also noted that the increase in numbers of unemployed recently means that "a greater proportion of the resources available for employment services" are "absorbed by the short-term unemployed", leaving fewer resources for the long-term unemployed.

It's clear that long-term unemployment is a key driver of disadvantage because the longer you are unemployed the more likely you will either stay unemployed, or lose faith and leave the labour force.

In the US the effects of skyrocketing long-term unemployment during the Great Recession, has been cause for reflection among policy advisors. Alan Krueger now regrets that the government "didn't do more to help the short-term unemployed avoid falling into long-term unemployment."

His paper concluded that "the most important policy challenges involve designing effective interventions to prevent the long-term unemployed from receding into the margins of the labour market or withdrawing from the labour force altogether."

Australia largely avoided the Great Recession but the recent sharp rise in long-term unemployed will be a key problem for the Abbott Government.

This problem also will test the Government's attempt to juggle its desires for job growth and also reduced government spending in industries such as manufacturing, which traditionally supported those now facing long periods out of work.

Greg Jericho writes weekly for The Drum. He tweets at @GrogsGamut. View his full profile here.